IMF Concerned for Development Goals in Shadow of Global Crisis

Sources
Financial Times: Fragile Development Gains in Danger
IMF: New Risks from Global Crisis Create Development Emergency
New York Times: Rising Powers Challenge U.S. on Role in IMF

The financial crisis currently gripping the globe is poised to cause disproportionate harm in the developing world. Emerging economies are closely tied to the financial stability of developed economies and dependent upon inflows of capital and aid. As the largest developed economies in the world struggle through a severe recession, developing countries are feeling the sting of evaporating export markets, frozen credit lines and the erosion of their hard-fought financial stability gains.

Developing world growth is projected to fall from an average of 8.1 percent in 2006-2007 to 1.6 percent in 2009. The African Development Bank (AfDB) expects export revenues to shrink by 40 percent for the continent as a whole this year—an estimated loss of $251 billion. Private capital flows to the developing world have waned dramatically and could be more than $700 billion lower in 2009 than their peak 2007 level. Stock prices in emerging markets have also plummeted, the MSCI Emerging Market Index dropping over 50 percent in 2008.

These figures, shocking on the page, translate to humanitarian disaster on the ground. Analysts expect the number of chronically hungry people to rise to over 1 billion this year, reversing earlier progress in the global fight against malnutrition. Because of the recession, an additional 55 to 90 million people will suffer from extreme poverty in 2009. African leaders feel anxiety about the resurgence of violent conflict and the failure of fragile governments. Many also fear that the financial crisis will curtail development efforts where the prospects are gravest—in combating HIV/AIDS, maternal and infant mortality and malaria.

In 2000, the UN established eight Millennium Development Goals (MDG), emphasizing the eradication of hunger, health and education objectives, and environmental priorities. On April 24th, the IMF voiced concern about MDG progress in the face of global financial crisis. IMF officials worry about “painfully slow” recovery in the developing world, and a lack of infrastructure and social safety nets for coping with the downturn. Both IMF and World Bank leaders are speaking out about the importance of maintaining MDG progress. At their April meeting, the G20 agreed to triple IMF resources to reach $750 billion and supported a general allocation of $250 billion, $100 billion of which will go directly to developing countries. The IMF pledged to scale up its funding to the developing world, doubling its concessional lending capacity. The IMF highlights the World Bank’s new Infrastructure Recovery and Assets platform as having the potential to bolster developing world infrastructure, where current needs exceed $900 billion yearly. Citing G20 commitments, the IMF also emphasizes trade liquidity support for the developing world and calls for the availability of $250 billion in trade financing over the next two years. Despite these commitments, some developed countries are falling behind in providing promised aid.

The current crisis will undoubtedly have a global impact. It remains to be seen however, whether the IMF, World Bank and greater international community can forestall a potentially devastating impact in the developing world.

Discussion:
1. Many economists were initially hopeful, hypothesizing that emerging economies would be less affected by the crisis. Emerging markets absorbed fewer of the “toxic” assets that plagued Wall Street, capital flight showed signs of slowing, and a chronic skills shortage seemed to be reversing as foreign-educated professionals returned home to developing countries. Why does this hypothesis fall short? Developing countries are feeling severe effects of the crisis. What factors contribute to their vulnerability?
2. The developed world has, for decades, dictated the path of global financial architecture. That structure is now in crisis and many developing world leaders, in African nations and China in particular, are questioning the role of American and European leaders in the IMF and World Bank. Is this the right time for institutional reform? Should this crisis impact the role of the United States in international organizations?